On money matters in a peer-to-peer world

A friend of mine recently decided to give up practising law and become an entrepreneur by launching her own fashion line. Five years ago, she might have asked me for the name of an ABN AMRO adviser to help her finance the venture, but today she wants to know which crowdfunding or peer-to-peer lending platform is right for her new business.

This is hardly an isolated case, and it says a lot about the rapid changes the market is undergoing. Although crowdfunding or peer-to-peer lending currently represents a relatively small market, it’s growing fast. And if P2P works for lending, what about other financial services like payments or insurance? These, too, are being challenged by new concepts that link up users via decentralised networks to do business directly with one another. If you look past traditional product offerings, you’ll suddenly see a profusion of new businesses bringing peer-to-peer power to other financial areas.

Peer-to-peer lending now a serious alternative

“The time for fun and games is over,” Jeroen Broekema, NL country manager of the P2P lending platform Funding Circle, recently said in the Dutch financial daily Het Financieele Dagblad. A new entrant in the Dutch market for alternative financing, Funding Circle means business with over €1 billion in loans to SMEs worldwide.

Also interesting is that the peer in peer-to-peer lending is gradually disappearing, with individual investors making way for professional investment funds looking to diversify their portfolios and thus preferring to finance “SME markets” rather than individual SMEs. So while the person-to-person aspect of this form of lending may be fading, the fact remains that a growing online playing field of supply and demand is, at least to some degree, rendering existing intermediaries (i.e. banks) obsolete.

Peer-to-peer-insurance: back to basics

Now the same phenomenon is starting to occur in the insurance market. Once, long ago, insurance emerged within small cooperatives which spread risk among their members. Now, once again, transparent – albeit online – communities are springing up, whose insured members are linked directly to one another without big, faceless and often opaque intermediaries (i.e. insurers) getting in the way. The so-called bread funds (or broodfondsen in Dutch) set up in the Netherlands in recent years are a case in point. Consisting of up to fifty members each, these collectives provide freelancers with a creative alternative to shelling out hefty monthly insurance premiums, and give them access to their very own contingency fund in the event of long-term illness.

Can the insurance market expect the same upheaval as seen in the lending market?

There are also examples in the insurance world of start-ups looking to harness P2P on a larger scale. The US insurer Lemonade calls itself “the world’s first P2P insurance carrier”, only this month securing $13 million in its first, and very successful, round of funding. Indeed, investor Sequoia Capital is “betting Lemonade will transform the insurance landscape beyond recognition”. The Chinese peer-to-peer insurer TongJuBao also has high aspirations, its founders anticipating the same, or better, growth rates for the Chinese insurance market as those seen in the lending market.

Closer to home in Germany, Friendsurance is a hit. Small groups of customers are bundled and receive a cash-back bonus at the end of every year they remain claimless. Other European countries, too, have seen the emergence of similar structures, such as Inspeer in France and Guevara in the UK. Should the insurance market be bracing itself for the same disruption as that seen in the lending market?

Peer-to-peer payments oiling the wheels of the sharing economy

In terms of payments, there’s already been quite some disruption. Payment service providers like PayPal and Adyen have positioned themselves between banks and their customers. But the reality is that the process of direct peer-to-peer payments still has a long way to go. In an ideal peer-to-peer economy, I would merrily swipe my way through the day, effortlessly carrying out all my micro-transactions with my phone – from paying for the gardening tools I borrowed to shared car rides, meals and accommodation. No IBANs or e-dentifiers to worry about, just simple online wallets linked to my bank account. This scenario is nearly a reality – in fact, Apple is currently working with several large US banks to negotiate a “mobile person-to-person payment service ‘mobile person-to-person payment service’. The service would let Apple enable its customers to carry out transactions without having to resort to a banking app and would, in turn, considerably strengthen their loyalty to the Apple brand.

Independent, smaller firms like the Dutch company Bunq are also entering the fray. With its slogan “explore the joys of requesting money”, Bunq hopes to transform the concept of payments as a necessary evil into a social activity, allowing its customers to make payments to their friends in real time, complete with attached photos and videos, hassle- and bank-free. If this trend continues, P2P payments will soon be mainstream in the Netherlands – and yet another example of the intermediary role of traditional big banks coming under pressure.

Lots of questions, few answers

Once you know where to look, you realise that P2P services represent a challenge to the financial sector in many areas. While the examples described above are hardly exhaustive, they do reflect a changing landscape, one in which P2P is a key driver, although admittedly not without its problems. After all, the market is still in its infancy, and while it makes a lot of promises, it’s still both volatile and vulnerable. Not to mention all the many uncertainties surrounding legislation, user needs and technology. In addition, risk management is tricky when it comes to small-scale initiatives.

So while I’m not going to sit here and tell you that banks will soon be sidelined or shut out by these new entrants, I do think that a promising new playing field is emerging, one in which combinations of existing structures and new solutions will drive the market. Established players like ABN AMRO will be challenged to open their doors and work together with peer-to-peer initiatives. Not only will banks have to help their customers by means of existing products and services, but they’ll also need to link them up in smart, innovative ways. Conversely, this shift will also let new players take advantage of established players’ networks and customer bases in order to reach more consumers.

As a result, banks can continue to do what they do best: facilitating financial solutions to meet their clients’ changing needs. That way, my friend’s new fashion line may be financed through crowdfunding and insured with her friends, but she can still benefit from ABN AMRO’s expertise and quality service.